USD/INR uptrend persists on oil price gains, but a US-Iran deal could spark sharp reversal

FUNDAMENTAL OVERVIEW

USD:

The greenback has found support lately from a hawkish shift in rate expectations driven by robust US economic figures and escalating US-Iran tensions.

That bullish impulse gathered steam last Wednesday after Trump dampened hopes for a swift resolution to the conflict with Iran, repeating that Washington would reach an accord with Tehran only after the November vote.

Also on Wednesday, a particularly strong batch of US Flash PMIs pushed Treasury yields to fresh peaks and lifted the probability of a rate increase in October to roughly 70%.

Ahead of the weekend, optimism for a US-Iran agreement revived when Tehran submitted a proposal to reopen the Strait of Hormuz within seven days, subject to conditions. However, Trump turned down that proposal on Saturday and stated to reporters that he anticipated a resumption of bombing Iran after the midterm elections.

During the American session on Monday, encouraging headlines began to emerge hinting at potential US concessions. Axios reported that Trump had offered Iran sanctions relief and access to frozen assets in return for progress on its nuclear programme, though the US President later denied those reports.

Trump did acknowledge that American and Iranian negotiators are communicating through intermediaries. Iranian Foreign Minister Araghchi indicated he expects a formal response today to Tehran's offer regarding the Strait of Hormuz.

Attention remains centred on the Middle East and the Federal Reserve. A diplomatic breakthrough would weigh on the US dollar in the near term, as aggressive rate hike expectations would probably be scaled back. Conversely, an extended deadlock or a fresh escalation would likely sustain the dollar's strength and push it to new highs.

INR:

For the rupee, the pattern of tracking oil prices has continued, with the latest rise in crude on fading hopes for a speedy agreement putting pressure on the currency.

Rising oil costs hurt the rupee because India relies on imports for most of its crude; a larger oil bill boosts demand for dollars, widens the trade deficit and adds downward pressure on the INR.

In the near term, oil prices will remain the primary driver for the INR, making the US-Iran talks crucial. A breakthrough should lift the Indian rupee, and the USD/INR pair could fall back to the 95.10 support relatively quickly. On the other hand, a negative outcome or a renewed escalation would likely keep supporting the pair as it heads toward new highs.

Over the longer term, the Indian rupee is on a bearish structural trend against the US dollar, so dip-buyers will keep seeking opportunities around strong major technical levels to drive the USD/INR pair to fresh record highs.

USDINR TECHNICAL ANALYSIS – DAILY TIMEFRAME

On the daily chart, USDINR has broken above the major resistance zone near the 96.10 level. This move has paved the way for a climb to new record highs, with buyers piling in on the break. If the price reaches the 97.33 level, sellers can be expected to step in there, with a defined risk above the record highs, positioning for a correction back to the 96.10 support. The buyers, meanwhile, will look for a break to increase their bullish bets toward new highs.

USDINR TECHNICAL ANALYSIS – 4 HOUR TIMEFRAME

On the 4-hour chart, an upward trendline defines the bullish momentum. Buyers will likely continue to lean on the trendline, with a defined risk below it, to keep targeting new highs. Sellers, on the other hand, will want to see the price break lower so they can pile in for a drop to the 95.75 level next.

USDINR TECHNICAL ANALYSIS – 1 HOUR TIMEFRAME

On the 1-hour chart, there is little new to add; buyers will have a better risk-to-reward setup around the trendline, while sellers will need a break to target a pullback to the 95.75 level next.

UPCOMING CATALYSTS

Today brings the US Consumer Confidence report and the US Job Openings data. Tuesday features the US ADP payrolls and the US PCE price index. Thursday delivers the US ISM Manufacturing PMI and the latest US Jobless Claims figures. Friday closes the week with the US NFP report. Still, the key focus remains on developments between the US and Iran.